Analysis: An Uncertain Future for Eike’s OGX

According to this Reuters News story , Fitch on May 17 downgraded OGX debt after it agreed to spend about $540 million to buy and develop 13 Brazilian oil and gas exploration blocks that it picked up at a government auction on May 14. The block purchases will put pressure on OGX cash as the company struggles to get its existing, underperforming offshore oil wells to produce more revenue.

OGX continues to spend money on new projects while it sells stakes in existing assets to raise money — and looks to cut costs. It is likely to tap the equity or debt markets to fund future projects. However, with the stock down more than 80% in the last year, and the company’s credit quality suffering, it may no longer be easy to raise large amounts of cash — and owner Eike Batista’s deep pockets are a little less deep. All these factors point to an uncertain future for OGX.

Below a chart showing OGX performance this year, and another showing its stronger underperformance when compared to Bovespa index (Brazil ETF EWZ).

Bottom Line: Brazil’s OGX Petroleo needs a gusher – in the ground and on its balance sheet. Current projects aren’t ramping up as expected and increasing debt levels and operating expenses are plaguing this oil and gas company.